Forecasting of aviation's situation through to the end of the year, released today by The International Air Transport Association (IATA), has shown airlines will be burning through cash at a rate of $300,000 a minute. Over the second half of the year, cash burn at airlines is predicted to amount to $77 billion. That's on top of the $51 billion already burned through in Q2 2020.
A cash burn of $77 billion by the end of the year
The International Air Transport Association (IATA) has today issued its latest piece of economic analysis, which paints a bleak picture for the airline industry. With travel demand much slower to recover than initially anticipated and the harsh winter season ahead, airlines are looking at many more months of burning through cash and liquidity.
Alexandre de Juniac, IATA's Director General and CEO, summarized how dire the outlook really is. He said,
“Airlines continue to burn through cash. For the second half of the year, we expect, on average, for airlines to burn through cash at about $300,000 per minute for a total of $77 billion. And that’s on top of the $51 billion cash burn in the second quarter.”
To calculate this estimate, IATA crunched the numbers from airline public reports release most recently in June. It's an astonishing figure, which is difficult for many to comprehend and forecasts a continuing challenging situation for our air transport companies.
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It was worse in Q2
Although the predictions of the ongoing cash burn are dire, things have actually improved since the second quarter of the year. Q2 is widely anticipated to have been the worst quarter for the aviation industry, with cash burn amplified by unavoidable costs, debt interest and refunds.
IATA's chief economist Brian Pearce commented,
“We think that the industry was burning through cash at a rate of just over $60 billion during the second quarter. That's around about $17 billion a month that they're running down their balances of cash.”
While things are expected to improve very slightly in the second half of 2020, there is still a long road back to a healthy and stable industry. Added to the $77 billion cash burn anticipated in H2, that brings us to the end of 2020 with a total cash burn of an astounding $128 billion.
Government support needed
A concerning estimate from the economists at IATA is the speed and strength of the recovery. While IATA has already downgraded its estimate of traffic recovery in 2020, it seems airlines are in for a long haul before they get back to 2019's times of abundance. Pearce estimates that airlines will not be in a cash positive position until 2022.
Equally concerning is the position of airlines to survive such a downturn. IATA's estimates of survivorship showed some of the strongest airlines with some 22 months of cash in the bank. However, there was also a long tail of airlines that have much shorter life expectancies; some with as little as two to four months. Pearce commented,
“The average airline has roughly 8.5 months of cash left at the rate of cash burn that we expect to see in the second half of this year. And if we look at what we would expect to happen through the early part of next year … we would expect still to see the industry burning through those cash balances.”
Clearly, 2022 is a lot longer than 8.5 months, which means airlines are going to need more support to survive. De Juniac issued a strong call for governments to provide additional funding to airlines over the next months and years. He noted,
“Airlines did receive $160 billion in support from governments. That was a lifeline. We would have seen many more bankruptcies and job losses without it. Now, most of those programs are ending. So it is time to ask governments to take extra measures to replace or extend them into the longer term. The potential for failures and job losses in the coming months is enormous.”
When asked how critical it is for governments to stump up the cash to support the industry, De Juniac responded,
“It’s pretty critical. Otherwise the industry will run out of cash, and we will see more and more bankruptcies. We are asking governments to extend their programs or to renew their program, or to conserve the financial support to the to the industry.
“It's critical and urgent.”
Should governments be stepping up now to save the industry? What's the answer to avoiding mass airline bankruptcies? Let us know your thoughts in the comments.